What a massive fiscal boost can and cannot accomplish

I feel like I am repeating myself, but since the topic is so much in the news, let’s give it another go.  A massive fiscal policy could:

1. Generate some investments which are worthwhile on their own terms.  LaGuardia really does need another runway.

2. If the broader monetary aggregates are falling, because of either a credit crunch or a liquidity trap, a fiscal boost can keep aggregate demand from deteriorating.  Note that this is distinct from bringing about a recovery; it is limiting further downside.

3. A fiscal boost can provide a beneficial "sunspot" in a multiple equilibrium model, thereby moving everyone to the higher output equilibrium.

4. If spending needs to fall, a fiscal boost can postpone this fall.  Postponing this fall may be a good idea to prevent immediate economic destruction.  But then the fiscal policy is not really bringing about recovery.  In fact the fiscal policy is (optimally, perhaps) hindering the pace of adjustment and recovery.  Fiscal policy makes the downturn less severe but it also prolongs the adjustment process.

You’ll note that only under #3 does a massive fiscal boost in fact bring about an economic recovery.  But I do not believe that #3 is better for anything than a few good days in the stock market nor do most people rely on #3 in making the case for fiscal policy.

You might also try #5:

5. The economy needs a boost to aggregate demand and since monetary policy isn’t working any more, fiscal policy has to step in.  This is usually followed by drawing a graph with two or three curves on it.

This makes sense if it is reworded to be more precise and to be some combination of #2 and #4.  But still, a huge fiscal boost will not bring recovery because a big chunk of the problem requires real economic adjustments (the simple graph obscures this).  The economy needs to adjust out of housing, out of so much consumption, and out of various classes of associated risky assets.  Those are some pretty massive adjustments and along the way lots of major banks become zombie banks.  A massive fiscal boost won’t get us over those problems.

Just to recap: Because of #1 and #2, you might think that a massive fiscal boost is a good idea, compared to the alternatives.  But you should not argue that a massive fiscal boost will bring about or drive an economic recovery.  It is tempting to cite #5 to justify the fiscal boost but the bottom line is some mix of #2 and #4. 

Whoops! Back to TARP after all…

The government is looking to buy substantial amount of assets from Citi
like a good bank, bad bank structure. The Government will absorb much
of the losses for Citi if there are losses and Citi would issue
preferred stock to the government. The government could buy more than
$100 billion in the bad assets if the plans go through.

Here is more.  Didn’t Paulson tell us just a few days ago that TARP wasn’t needed after all?

Doesn’t this mean that Paulson should speak less frequently?

And yes, we do now have the Paulson plan and the Dodd plan all rolled into one.  And as CalculatedRisk noted:

Hey, I thought Citi WAS the bad bank!

Addendum: Read this lovely update!

Assorted links

1. Property rights and air pollution

2. Pirate headlines (humor)

3. 2666, the perfect book review (now that I’ve read the book)

4. Update on the quest for the Netflix prize, interesting throughout

5. Triumph of the small countries; Israel just displaced Armenia for top position in the Chess Olympiad; Russia and the United States lag behind.  The standings and major contestants are here.

Iowa City fact of the day

In 2006, for a population of 63,027, there were 63,713
public library patrons; borrowers as a percentage of population reached
101 percent.

Is Will Wilkinson now one of them?  Here is more.  In another life, I would write a whole blog just on public libraries.  UNESCO, by the way, has just designated Iowa City as the world’s third City of Literature.  Edinburgh and Melbourne are the other two.

The Myth of the Rational Elected Official

Hail Mark Steckbeck, for sending me such content:

US elected officials scored abysmally on a test measuring their
civic knowledge, with an average grade of just 44 percent, the group
that organized the exam said Thursday.

Ordinary citizens did not fare much better, scoring just 49 percent correct on the 33 exam questions compiled by the Intercollegiate Studies Institute (ISI).   

Here’s one detail:

Asked about the electoral college, 20 percent of elected officials incorrectly said it was established to "supervise the first televised presidential debates."

Here is the clincher:

The question that received the fewest correct responses, just 16
percent, tested respondents’ basic understanding of economic
principles, asking why "free markets typically secure more economic
prosperity than government’s centralized planning?"

This one is a little tricky:

Forty percent of respondents, meanwhile, incorrectly believed that the US president has the power to declare war, while 54 percent correctly answered that that power rests with Congress.

I’m not sure if those last few numbers are for the officials or for everyone, though it doesn’t much seem to matter.  The quiz itself is hereHere is more on the results for the non-officials.

Why are music reviews so positive?

The perspicacious Peter Suderman writes:

…the critical medium that suffers most [from overly positive reviews] is pop music criticism, which
skews toward generally positive reviews of most everything, no matter
how bland or terrible. Scan the sidebar of Metacritic’s music page.
Nearly all of the review averages are positive or very positive, and
almost none of them are straightforward pans. In fact, right now I
don’t see a single album with a review average that gets a score
categorized "generally negative reviews." Contrast this with the movies page,
which contains more than a dozen films with low averages. Even the
limited release indies – the "artsy" films – are often given low marks.

But why?  When it comes to a movie, you might actually go see the movie if you read a good review.  Therefore the newspaper must be careful not to mislead you too many times and that implies a certain amount of criticism.  But even a well-reviewed CD you are unlikely to buy, if only because there are so many CDs out there and there are so many well-defined genre preferences.  So the MSM source courts many good music reviews, to give readers a sense that they are learning about "interesting product"; in any case only the fans will buy the stuff.

One testable prediction of this hypothesis is the following: when musical taste was less fragmented, and a review was more likely to influence buying decisions, music reviews would have been more critical.  Similarly, if the outlet is pure niche, and thus being read by potential buyers only, the reviews should be more critical as well.

In the comments on Suderman, William Brafford comes close to this view.

I might add that Washington Post restaurant reviews are far too positive.  If WP readers were simply told "There are hardly any good restaurants in your crummy little city," this wouldn’t do much for WP circulation or advertising revenue.

The less that people buy books, the more positive book reviews should become.

The world’s best symphony orchestras?

Gramophone magazine polled music critics and here is the top ten list they came up with:

1 Royal Concertgebouw Orchestra

2 Berlin Philharmonic Orchestra

3 Vienna Philharmonic Orchestra

4 London Symphony Orchestra

5 Chicago Symphony Orchestra

6 Bavarian Radio Symphony

7 Cleveland Orchestra

8 Los Angeles Philharmonic

9 Budapest Festival Orchestra

10 Dresden Staatskapelle

You’ll find 10-20 here, along with some discussion.  The news, if that is what you would call it, is that Philadelphia does not make the list at all.  Here is another discussion of the results.

What are the lessons from the New Deal?

This week they put my Sunday column on the web on Friday; I was alerted by the ever-vigilant Mark Thoma.  The intro is this:

The traditional story is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention;
the truth is that Roosevelt changed course from year to year, trying a
mix of policies, some good and some bad. It’s worth sorting through
this grab bag now, to evaluate whether any of these policies might be
helpful.

If I were preparing a “New Deal crib sheet,”  I would start with the following lessons…

The conclusion is this:

In short, expansionary monetary policy and wartime orders from Europe,
not the well-known policies of the New Deal, did the most to make the
American economy climb out of the Depression. Our current downturn will
end as well someday, and, as in the ’30s, the recovery will probably
come for reasons that have little to do with most policy initiatives.

Read the whole thing.  For critical responses, perhaps you can try the comments section at Mark Thoma’s.  For reasons of space, it was not possible to specify that I was praising the proposed Obama middle-class tax cut.  I do not, however, think it will do much (if anything) to end the current recession, although tax hikes could make things worse.

Larry Summers in the White House

Harvard University professor
Lawrence Summers will join the Obama administration with a
ready-made sales pitch for substantial economic stimulus and a
chance that the role springboards him to the Federal Reserve.  Summers, 53, was Bill Clinton’s last Treasury secretary. He
will have a wide-ranging portfolio and help craft Obama’s
economic policies, a Democratic aide said…It also positions him to
succeed Fed Chairman Ben S. Bernanke, whose term at the helm of
the central bank expires in January 2010, said Vincent Reinhart,
former director of the Fed’s Division of Monetary Affairs.

Here is the story.

CEA rumors

From Megan McArdle.  Austan Goolsbee may be going elsewhere.  This could be either good or bad news; in any case the goal is to maximize his influence.  The name Cecilia Elena Rouse is being floated for the CEA position.

Addendum: Alex posted earlier this year about Rouse’s important paper finding that education vouchers increase the quality of public schools.  Rouse was also an adviser for Kerry.  MR archives know all!

More book awards: high standards in Iran

Yes, it’s that time of year again: they named the winners of the Sacred Defense Book of the Year awards in Iran…

Yet in ten major categories, including "Fiction," no books were deemed worthy of the honor.  The category "Children’s War Poetry" was left open as well.  Here is further information.  Here is a photo of the event, plus a list of the books that were honored.  Numerous second prizes were given even though no first prizes were awarded.